tripath sj order

8/6/2019 Tripath SJ Order

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ORDERON MOTION FOR SUMMARY JUDGMENT

UNITED STATES BANKRUPTCY COURT

NORTHERN DISTRICT OF CALIFORNIA

In re:

TRIPATH TECHNOLOGY, INC.,

Debtors.

Case No. 07-50358 CN

Chapter 11

RICHARD C. HERMERDING, asDisbursing Agent of the Post-Effective DateEstate of Tripath Technology, Inc.,

Plaintiff,

vs.

ADYA S. TRIPATHI, aka ACHARYA, Y.S.FU, AKIFUMI GOTO AND ANDYJASUJA,

Defendants.

Adversary No. 09-5004

ORDER ON DEFENDANTS MOTIONFOR SUMMARY JUDGMENT

On November 5, 2010, this court conducted a hearing on the duly noticed motion for

summary judgment by defendants Adaya S Tripathi, A.K. Acharya, Y.S. Fu, Akifumi Goto, and

Andy Jasuja (collectively, the Defendants). All appearances were noted on the record. The

following constitutes the courts findings of fact and conclusions of law under F.R.B.P. 7052.

The parties do not dispute a substantial portion of the relevant facts at issue in Defendants

The following constitutesthe order of the court. Signed May 12, 2011

________________________________________Charles Novack

U.S. Bankruptcy Judge________________________________________

Entered on DocketMay 13, 2011GLORIA L. FRANKLIN, CLERKU.S BANKRUPTCY COURTNORTHERN DISTRICT OF CALIFORNIA

Case: 09-05004 Doc# 77 Filed: 05/12/11 Entered: 05/13/11 18:15:39 Page 1 of 14


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1 While the Defendants filed objections to some of Hermerdings evidence, all but one of thoobjections were overruled at the November 5, 2010 hearing. To the extent that the court sustainedthe Defendants objection no. 10 relating to certain deposition testimony of Rahul Shinkre, thosefacts are not included herein.

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motion for summary judgment.1 Instead, the main thrusts of the parties legal jousts are the

reasonable inferences that the court must make under F.R.B.P. 7056, and the Delaware law that it

must apply. In February 2007, Tripath Technology, Inc. (Tripath), a Delaware corporation, filed

Chapter 11 bankruptcy in the United States Bankruptcy Court for the Northern District of CaliforniIts bankruptcy filing was substantially caused by Tripaths several cash shortage that began, for

purposes of this motion, in 2005, and its subsequent inability to consummate a sale of its assets or

obtain a sufficient cash infusion through borrowing or capital investment. At all relevant times,

Defendants were the sole members of Tripaths board of directors. Acharya, Fu, Goto, and Jasuja

were outside, independent board members (the Outside Board Members), and Tripathi, who

founded the company, served as Tripaths president and chief executive officer. Plaintiff Richard

C. Hermerding is the disbursing agent appointed under the Chapter 11 Debtors confirmed Chapter

11 plan. In his complaint, Hermerding asserts that the Defendants breached their fiduciary duties o

due care, loyalty and good faith by failing to respond to Tripaths financial crisis and preserve

Tripaths net value for its shareholders and creditors.

The parties do not dispute that Tripath was in significant financial trouble from (at least) m

2005 to its bankruptcy filing. During 2005, Tripath resorted to expensive, private financing(including a $4.5 million round of private investment in public equity financing (PIPE) in March

2005, a $6 million line of credit obtained in August 2005, and a second, $5 million PIPE infusion i

November 2005) and was forced to secure the November 2005 PIPE borrowing with its intellectua

property and other personal property assets. When Tripath held its November 2, 2005 board of

directors and audit committee meetings, the Defendants knew or shortly thereafter learned that,

among other things, a) the Nasdaq stock exchange intended to delist Tripath; b) Tripath was

jeopardizing its supplier and distributor relationships by not timely paying its account payables; c)



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2 In September 2006, Tripaths outside corporate counsel strongly advised the Defendants thathey jeopardized violating their fiduciary duties if they did not meet more frequently regardingTripaths financial crisis. The Defendants either ignored or rejected this advice.

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Tripaths outside auditor intended to issue a going concern qualification to its audit opinion whic

would question Tripaths ability to continue as a going concern for another year; and d) Tripath

would run out of cash by March/April 2006. During his deposition, Tripathi conceded that the

November 2005 PIPE borrowing began the companys financial death spiral.

Tripaths financial woes escalated in 2006. By early August 2006, Defendants knew that th

company was out of operating capital, that its projected September cash balance would be

approximately $7,000.00, that its account payables were substantially increasing both in amount an

days outstanding, and that the company was allowing one of its largest customers to pre-pay

receivables (to generate cash flow) at a substantial loss. Despite Tripaths ongoing financial crisis

Defendants convened only three regularly scheduled board meetings in 2006: January 31, 2006, M

2, 2006, and August 8, 2006.2 Rather than actively participating in the efforts to rescue the

company, the Outside Board Members instead allowed Tripathi to assume this task. As discussed

greater detail below, the evidence suggests that Tripathis interests did not necessarily align with

those of his company.

Tripathis efforts during 2006 resulted in several potential sale and financing opportunitiesthat possibly could have preserved Tripaths value and generated a greater return to its creditors tha

its Chapter 11 bankruptcy. None of these deals came to fruition, and Hermerding asserts that the

failed negotiations are damning evidence of the Defendants fiduciary lapses. In contrast, the

Defendants assert that the evidence presented to this court demonstrates that they met their fiduciar

obligations. For example, in January 2006, Tripath and Cirrus Logic executed a non-disclosure

agreement and began due diligence regarding Cirrus Logics interest in purchasing some of

Tripaths intellectual property. In April 2006, Cirrus offered to purchase these assets for $30

million, with half of the funds payable immediately. Cirrus informed Tripathi that it wanted to mo



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3 Because the Outside Board Members resided outside the United States and had internationabusiness interests, it may have been difficult for the Board to meet. Regardless, the Defendantsapparently did not even discuss the Cirrus Logic offer by other means. Moreover, the Defendantsnever retained an investment banker or any other professional to advise them on the Cirrus Logicoffer (or any other offer during 2006). Hermerding contends that the Defendants failure to retain investment banker prevented them from effectively and properly marketing Tripath at a time whenthey desperately needed professional, unbiased advice.

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quickly and to have a seamless transition of the products, employees, and customer support that

would be part of the transaction. Without consulting with the Outside Board Members, Tripathi

tentatively accepted the $30 million offer but asked that more be paid up front. None of the Outsid

Board Members recalls meeting or discussing the Cirrus Logic offer, and the May 2, 2006 boardminutes do not disclose that it was discussed.3 The Outside Board Members also were not aware

that Cirrus had conducted due diligence. The parties did not consummate any deal, and the eviden

presented to this court does not clearly establish the reasons why the parties terminated their sale

discussions.

In August 2006, Enable Capital Management (which had previously provided bridge

financing to Tripath) offered to make an additional $2.5 million bridge loan to the company. The

loan, in the form of 10% senior secured convertible notes (payable a year from closing), had severa

conditions, including: 1) Tripaths retention of an investment banker to seek strategic alternatives

and partnerships, such as joint ventures and the companys sale; 2) obtaining an additional $8 - 13

million in financing within 90 days; and 3) Tripathis resignation as president and CEO. The

evidence suggests that Tripathi rejected Enables offer by email dated August 16, 2006 without

submitting it to the Outside Board Members. Enable responded to Tripathis August 16

th

email bydirectly emailing the Outside Board Members on August 17, 2006 to inquire whether they had

considered Enables offer. At or about the same time, Tripaths CFO sent his own email to the

Outside Board Members to inform them that he was available to meet with them to discuss Enable

offer. Tripaths controller also emailed the Outside Board Members and informed them that she

believed that the companys investors would timely invest another $8 - 13 million.



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4 Tripathi describes these other offers as ones that he had briefed in the last board meeting.The last board meeting was held on August 8, 2006. There is no evidence before the court that theDefendants discussed any of these offers in any detail during the August 8th board meeting.

5 This endorsement of current management seemingly was in response to the emails that theOutside Board Members received directly from Tripaths corporate controller and CFO. Tripathwas upset that the controller and CFO directly contacted his fellow board members, and heterminated their employment soon thereafter.

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Tripathi responded to this flurry of emails with his own email to the Outside Board

Members. In an email dated August 17, 2006, Tripathi briefly informed the Outside Board Membe

of the Enable offer. Tripathis email stated that he was entertaining multiple offers,

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and that theEnable bridge loan was the worst one and an absolute last resort. He asked for additional time

to bring a definitive deal to the table. Rather than requesting a more detailed explanation of the

Enable offer and a comprehensive status report on the other offers that Tripathi was pursuing, the

Outside Board Members acquiesced and simply endorsed Tripathis rejection of the Enable bridge

loan. Most of the emails from the Outside Board Members simply reiterated their support for

current management.5 Defendant Goto was the only Outside Board Member to express any

concern regarding the status of these other options. His August 17th email response to Tripathi,

which was copied to all directors, stated that I support [Tripathis] direction on this matter

however suggest to have our meeting soon to review all possibilities. . . . [Tripathi] informed us tha

most of our accounting personnel is leaving. That is also my worry because that is very important

division right now. Despite these comments, the Defendants did not convene a special meeting to

discuss the status of the companys financial affairs or Tripathis multiple, other options.

In the fall of 2006, Tripath received competing purchase offers from NanoAmp Solutions,

Inc. (NanoAmp) and Wolfson Microelectronics (Wolfson) that represented Tripaths last gasp

pre-petition opportunities to obtain value for its assets. Neither deal closed, and Hermerding alleg

that Defendants responses to these offers further demonstrate their breach of their fiduciary duties



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28 6 For example, defendant Goto was on vacation from November 1st through November 13th.

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NanoAmp conveyed its offer on October 30, 2006. As revised, NanoAmp sought to acquir

virtually all of Tripaths equity with a $15 million investment into the company. NanoAmps

proposal contemplated that Tripath would become its subsidiary and that certain key employees

could participate in the equity of the surviving corporation. NanoAmp contemplated a deal thatwould close in approximately 30 days. The non-binding offer did not mention which key employe

would participate in equity, and its offer would substantially dilute the value of Tripaths present

shares. Moreover, the deal required that Tripathi resign as the companys CEO (but possibly remai

as the companys CTO). Wolfson alternatively proposed an $11 million acquisition through a pre

packaged Chapter 11 bankruptcy, along with a commitment for $1.5 million in bridge/debtor-in-

possession financing. The Chapter 11 bankruptcy would generate little, if any return to the

companys shareholders.

Tripathi waited until November 7, 2006 to convey these offers to the Outside Board

Members; even then, his email only summarily described their terms. Despite the companys

desperate financial straits, the Defendants did not formally meet to review the competing offers6.

In his November 7

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email, Tripathi stated his preference to pursue the NanoAmp offer. Heinformed the Outside Board Members that the NanoAmp offer would retain a functioning Tripath

and would allow the company to avoid filing a bankruptcy. Although his email concluded by askin

for any comments and advice, this court is unaware of any evidence indicating that the Outside

Board Members responded to this solicitation. Instead, the only evidence before this court is that

defendant Acharya responded by email stating that it was OK for Tripathi to pursue the NanoAm

offer. Defendant Goto may not have seen this email until after he returned from vacation.

The Outside Board Members authorized Tripathi to reject the Wolfson offer and pursue the

NanoAmp without the advice of an investment banker. Hermerding contends that Tripathi down



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7 As part of the deal, NanoAmp may have agreed to reimburse Tripathi for certain legal feeshe had paid on Tripaths behalf.

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played the Wolfson offer due to his strong desire to avoid the stigma of his eponymous company

filing for bankruptcy, and there is some deposition testimony supporting his contention. Tripathis

November 7th email did not disclose this reasoning to the Outside Board Members. Nor did it

disclose Wolfsons belief that the company would have sufficient funds after it filed its Chapter 11to confirm a Chapter 11 plan.

Tripathi signed the October 30, 2006 NanoAmp letter of intent on November 10, 2006.

More than a month passed before the Board of Directors met to consider it. On December 12, 2006

in their first full board of directors meeting since August, the Defendants considered the NanoAmp

offer and the previously rejected Wolfson deal. The board minutes starkly state that the company

was insolvent, could not pay its D & O insurance premium, and was facing debenture defaults and

an unlawful detainer proceeding from its landlord. The minutes also indicate that Defendants

approved the NanoAmp proposal. On December 13, 2006, the day after the board meeting,

Tripathi sent an email to NanoAmps CEO requesting that NanoAmp prepare and forward to him

the paper work for my employment/consulting contract (including the complete

medical/dental/vision coverage through the year end 2007), and commitment for Howard Rice

payments,

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prepared as a part of signing all needed documents. I would still like to ask for myseverance to include full salary until June 30, 2007, for asking me to resign after ten and half years

of service in the CEO capacity. Also as we discussed yesterday, we still need the commitment for

the sabbatical as well.

The evidence strongly suggests that in December 2006, Tripathi backdated favorable

changes in the companys sabbatical policy to July 2006 that would allow him to receive three

months of paid sabbatical from NanoAmp.



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On December 15, 2006, NanoAmp terminated its negotiations with Tripath, stating that its

decision is based on an overall review of the risks and benefits of the transaction. Economic

concessions or adjustments would not change this assessment.

Tripath filed its Chapter 11 bankruptcy on February 8, 2007. It assets were purchased durin

the bankruptcy for $4 million by Cirrus Logic. Hermerdings expert witnesses have testified that

had Defendants retained an investment broker or a finance expert to provide them with strategic

advice, Tripath possibly could have negotiated a significantly larger sale without a bankruptcy.

Hermerdings expert quantified the damages at $8.2 million to $18.7 million.

MOTION FOR SUMMARY JUDGEMENT STANDARD

The summary judgment standard under F.R.B.P. 7056 is well settled. Summary judgment

should be granted if the pleadings, the discovery and disclosure materials on file, and any affidavi

show that there is no genuine issue as to any material fact and that the movant is entitled to judgme

as a matter of law. Fed. R. Civ. P. 56(c)(2); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322-2

106 S. Ct. 2548, 91 L. Ed. 2d 265 (1986). Only disputes over facts that might affect the outcome the suit under the governing law will properly preclude the entry of summary judgment. Anderso

v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986). This courts

duty is not to weigh the evidence and decide the truth of the allegations, but to determine whether

there is a genuine issue for trial. Id. at 249. Where the non-moving party bears the burden of proo

at trial [s]ummary judgment is warranted if the nonmovant fails to make a showing sufficient to

establish the existence of an element essential to [his] case. Nebraska v. Wyoming, 507 U.S. 584,

590, 113 S. Ct. 1689, 124 L. Ed. 2d 317 (1993) (quoting, Celotex, 477 U.S. at 322). The moving

party can meet its burden by pointing out the absence of evidence from the non-moving party, and

it need not disprove the other partys case. Miller v. Glenn Miller Prods., Inc., 454 F.3d 975, 98

(9th Cir. 2006). Accordingly, the nonmoving party must come forward with specific facts showing

there is a genuine issue for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574



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587, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986). Finally, since Hermerding, the plaintiff, is the non-

movant, all justifiable inferences must be drawn in his favor. Anderson, 477 U.S. at 255, 106 S. C

at 2513.

BREACH OF FIDUCIARY DUTY CLAIMS

Tripath is a Delaware corporation, and all parties agree that Delaware law governs the breac

of fiduciary duty claims. Under Delaware law, corporate directors and officers owe their

shareholders fiduciary duties of loyalty and care. Gantler v. Stephens, 965 A.2d 695, 708-09 (Del.

2009). While Hermerdings complaint specifically identifies instances of the defendants alleged

breach of their duty of loyalty, it only generally alleges that defendants conduct violated their duty

of due care. Delawares General Corporation law authorizes a corporation to include it its charter

provision eliminating or limiting the personal liability of a director to the corporation or its

stockholders for monetary damages for breach of fiduciary duty as a director. Del. Code. Ann. tit.

8, 102(b)(7). Tripaths charter contains such exculpatory language, and defendants have asserted

this provision as an affirmative defense. Accordingly, to the extent that Hermerding asserts that

Defendants breached their duty of due care as directors, this court grants summary judgment in favof Defendants with regard to those claims. The court also grants summary judgment with regard t

any allegations that Tripathi breached his duty of due care as a Tripath officer. The law is clear

that where it is impossible to separate actions taken in fulfillment of a defendants directorial dutie

from actions taken in fulfillment of that defendants duties as a corporate officer, then any duty of

care claim stated against that individual is exculpated. Brown v. Brewer, 2010 U.S. Dist. LEXIS

60863, 2010 WL 2472182, at *3 (C.D. Cal. Jun. 17, 2010). Hermerding has not identified any

actions taken by Tripathi solely in his capacity as a Tripath officer.

Defendants motion for summary judgment with regard to their claim for breach of the duty

of loyalty is, however, denied. To hold a director liable for breaching the duty of loyalty,

Hermerding must demonstrate that a majority of the Director Defendants either [1] stood on both



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sides of the merger or were dominated or controlled by someone who did; or [2] failed to act in goo

faith, i.e., where a fiduciary intentionally fails to act in the face of a known duty to act,

demonstrating a conscious disregard for his duties. Brown, 2010 WL 2472182, at *3, citing,

Lyondell Chem Co. v. Ryan, 970 A.2d 235, 239-40 (Del. 2009). Only the second element appearsbe at issue in this case.

The Delaware Supreme Court has described bad faith in the corporate fiduciary context as

encompassing a spectrum of directorial conduct. In re Walt Disney Co. Derivative Litig., 906 A.2

27, 64 (Del. 2006). At one end lies a category of acts involving non-exculpable, so-called

subjective bad faith, that is, fiduciary conduct motivated by an actual intent to do harm. Brown,

2010 WL 2472182, at *4, citing, Disney, 906 A.2d at 64. The opposite end of the spectrum involv

conduct demonstrating a lack of due care that is, fiduciary action taken solely by reason of gross

negligence and without any malevolent intent. . . . Brown, 2010 WL 2472182, at *4. In the middla third category consists of intentional dereliction of duty or a conscious disregard for ones

responsibilities. Disney, 906 A.2d at 66. [S]uch misconduct . . . is properly treated as a non-

exculpable, . . . violation of the fiduciary duty to act in good faith. Id. It is this last category that

at issue in this case.

Stated differently, imposition of liability requires a showing that the directors knew that the

were not discharging their fiduciary obligations. Where directors fail to act in the face of a know

duty to act, [thereby] demonstrating a conscious disregard for [their] duties, they breach their duty

of loyalty by failing to discharge that fiduciary obligation in good faith. Disney, 906 A.2d at 67.

Because of the emphasis on intent, claims asserting a breach of the duty of loyalty are not

readily susceptible to resolution by summary judgment. More profoundly, however, this court

disagrees with the Defendants contention that the Delaware Supreme Courts decision in Lyondell

heightens the standard for establishing a breach of the duty of loyalty based on lack of good faith.

Defendants assert that, under Lyondell, this court must grant their summary judgment motion if it

Case: 09-05004 Doc# 77 Filed: 05/12/11 Entered: 05/13/11 18:15:39 Page 10 of14


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cannot find that the Defendants utterly failed in their duties to find a buyer for Tripaths assets or

lender who could have preserved the company. For the reasons explained more fully by the distric

court in Brown, this court agrees with that courts conclusion that the Lyondell court did not

supplant the definition of bad faith set forth in Disney. Nor did it suggest any unprecedenteddiminishment of Revlon duties, as suggested by the minimalist standard Defendants advance. If

such a radical departure were intended, we think the court would have taken pains to say as much.

Brown 2010 WL 2472182, at *8.

Accordingly, the court must determine whether there is a genuine issue of material fact

regarding whether Defendants consciously disregarded their duties in the face of Tripaths ongoing

financial crisis.

The court reminds the parties that its role is not to make findings of fact but to determine

whether there are genuine issues of material fact after drawing all justifiable inferences in

Hermerdings favor. The court believes that there are genuine issues of material fact regarding

whether Defendants consciously disregarded their duties. The Defendants knew in 2005 that Tripa

was teetering on the financial edge, that it would run out of cash in 2006, and that its auditorsbelieved that it had less than a year to survive unless the company sold itself or found substantial,

additional capital. Tripaths experienced outside counsel informed them that they needed to respon

to this crisis by, if nothing else, meeting more frequently to stay abreast of the companys financial

crisis and direct Tripathis efforts. The mid-August 2006 competing emails that they received from

Enable, Tripathi and Tripaths controller and CFO are stark examples that the Outside Board

Members should have demanded far more information from Tripathi regarding the multiple deals

that he was negotiating on their behalf, and that they should have insisted on a much more active

role in the companys efforts to preserve its value. Instead, the Outside Board Members allowed

Tripathi, who apparently had no experience negotiating the sale of a company, to take the lead, and

furthermore did not retain or even consider retaining an investment banker to assist his efforts. Th

Outside Board Members were at best docile and at worst willfully and consciously delinquent in



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8 Defendants contend that their failure to retain an investment banker and decision to entrustthe companys president with negotiating with potential bidders and investors do not, standingalone, demonstrate that they consciously disregarded their duties. The court believes, however, thathere is no single blue-print for fulfilling the duty to maximize value. Toys R Us, Inc.Shareholder Litigation, 877 A.2d 975, 1000 (Del. Ch. 2005), quoting, Barkan v. Amsted Indus., 56A.2d 1279, 1286 (Del. 1989). The facts presented to this court indicate that the Outside BoardMembers did little beyond delegating their responsibilities to Tripathi, and may have willfullyremained ignorant of his efforts.

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their board duties. The trier of act must decide where on the Disney spectrum they fall.8

The court also holds that there are substantial questions of fact regarding Tripathis conduc

The facts and the reasonable inferences therefrom indicate that Tripathi was primarily interested intransactions that would preserve his employment status and sabbatical rights, as well as keep his

self-named company out of bankruptcy. Indeed, the evidence strongly suggests that he back-dated

amendments to Tripaths sabbatical policy in order to negotiate a better employment deal with

NanoAmp (the impact of which could not have improved Tripaths chances of consummating a

NanoAmp transaction). He terminated the employment of Tripath employees who apparently were

willing to assist the Outside Board Members in analyzing transactions that did not meet his persona

goals, failed to keep the Outside Board Members timely and fully apprised of the status of his

negotiations, ignored the need for the Board to meet more frequently, and failed to consult with an

investment broker. This conduct, and in particular, Tripathis interest in deals that would protect h

reputation, employment status and benefits, indicates that he may have violated his duty to advance

corporate well-being over his own. If true, such conduct violates a board members duty of

loyalty. See Revlon, Inc. v. MacAndews & Forbes Holdings, Inc., 506 A. 2d 173 (Del. 1986).

Finally, the court finds that there are substantial questions of fact regarding damages that

merit a trial. Experts routinely testify on a wide range of subjects pertinent to damages. Wright

and Gold, Federal Practice and Procedure - Evidence 6264, p. 241 (1997). As a general rule, th

factual basis of an expert opinion goes to the credibility of the testimony, not the admissibility, and

is up to the opposing party to examine the factual basis for the opinion in cross-examination. In r



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Japanese Electronic Products Antitrust Litig., 723 F. 2d 238, 279, (3d Cir. 1983), rev. on other

grounds, Matsushita Elec. Industrial Co. v. Zenith Radio, 475 U.S. 574, 106 S. Ct. 1348, 89 L. Ed.2

538 (1986). While plaintiffs expert testimony may be less persuasive because no pre-petition deal

was consummated, the factual underpinnings of this testimony is a matter for the trier of fact toweigh.

* * * END OF ORDER * * *



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COURT SERVICE LIST

George S. TrevorPearson, Simon, Warshaw and Penny

44 Montgomery St. #2450San Francisco, CA 94104

Robert A. JigarjianJigarjian Law Office128 Tunstead Ave.San Anselmo, CA 94960

David PriebeDLA Piper LLP US2000 University Ave.East Palo Alto, CA 94303

Rajiv DharnidharkaDLA Piper LLP US2000 University Ave.East Palo Alto, CA 94303

tripath sj order

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